Bet against me if you want

Rising bond yields and a hotter than expected PPI reading from the US, on top of the breakout in energy markets, have been the driving forces in markets this week. Oil up 13% on the week, as more major pipelines are threatened. Cryptos on the slide, Bitcoin down 5%. Likewise metals negative, gold down 2.5%. The 10-year Treasury yield hitting 5% now appears an inevitability, amid a global bond selloff. All eyes on US CPI tonight, leading into three live rates decisions next week. Read on for further details and a preview of what will move markets next week.

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I am the house

“Well, it’s my dream, I have asymmetric information”. One of several eyebrow raising lines among a quite extraordinary set of remarks made by US Treasury Secretary Scott Bessent at a Southern Methodist University event in Texas earlier in the week. Bessent was referring primarily to his previously unseen degree of engagement with Japan on economic policy making, in a broader conversation on recent market interventions. Leaning into his previously announced whatever-it-takes approach to correcting markets, so to speak, he is now blatantly challenging market participants to bet against him and his team.

Is Bessent now at risk of flying too close to the (Land of the Rising) sun though? His former mentor, Stanley Druckenmiller, certainly believes so: “governments defending prices against fundamentals always lose” wrote the legendary hedge fund manager in a recent opinion piece in the Wall Street Journal. Japanese Finance Minister Satsuki Katayama also labelled Bessent’s remarks as “a bit scary”. But further moves in yen pairs this week, apparently without fresh intervention, have boosted the Treasury Secretary’s credibility and evidently his confidence that he can press pause on market moves that have gone too far in his eyes. This week’s drop through 155 in USDJPY has encouraged hedge funds to increase bearish trades on the pair.

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The hawks have taken over

Surging oil prices, driven by claims of a Houthi strike on Saudi Arabia’s main export route, have further fueled Treasury yields towards historically significant levels. The yield on 10-year notes hit its highest point since 2023, and is approaching levels last seen in 2007. Naturally the moves in bond markets have not been isolated to the US. Germany’s 10-year yield hit their highest point since 2009, and benchmark yields in Australia have hit levels not seen in a decade. What will it take to ease the pain? It appears that only a lower CPI in the US, or a hike from the Fed will break the trend at this point.

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Next week

A live Fed rates decision stands out on the economic calendar. Last month was a 9-3 split in favour of holding steady. It has been a particularly eventful period between meetings: a reset at Jackson Hole; firmer than expected NFP and PPI readings; and of course higher oil prices. At time of writing, markets are pricing the chances of a hike to 3.75% - 4.00% at 70%. Tonight’s CPI reading could sway that in either direction significantly though. Later on Thursday, the BoE will hand down their own rates call. Despite a 9-3 split there last time too, markets are only pricing in a 25% chance of a hike by Governor Bailey and co. this month. Last in a big week will be the BoJ. They hiked in June and held in July. Despite rates in Japan now sitting at their highest level since 1995, Governor Ueda has made it clear that further hikes are very much in consideration. Indeed with inflation having strengthened since, markets are pricing in a 90% chance of another 25bp increase next week. Thus with a hike seemingly a given, any signals towards the likely pace of further changes will be the more interesting element to watch for.

The US earnings calendar is quiet, with Q3 releases now on the horizon. Go well out there.